Falling oil will drive down pump prices, but will also have a serious impact on the economy

Oil prices tumbled on Monday, March 9, taking with them all the stock exchanges already very concerned about the consequences of coronavirus. They were down as much as 30% in Asia and Brent crude was still down more than 19% at 4 p.m. at $36.59. This fall in black gold, the largest since the 1991 Gulf War, comes after Saudi Arabia launched a “war” in prices. Riyadh has decided to significantly increase its production — potentially up to 12 million barrels — and to offer significant delivery price reductions for its customers.

The Saudi kingdom and the Organization of the Petroleum Exporting Countries (OPEC) have not reached an agreement with Russia on a further reduction in production in order to stem the decline in oil prices, which have been penalized by the coronavirus, which is causing reduced economic activity and fuel demand. The Russians would have preferred to turn their backs on Riyadh to penalize American production by reviving a price war. The United States, which became the world’s largest producer in 2018, has a fragile oil industry because it is very expensive and unprofitable.

Shale oil, which has been rushed by U.S. companies, is constantly demanding significant investment and new drilling. Strong downward pressure on prices could “potentially lead to a significant number of bankruptcies in the United States,” says Benjamin Louvet, commodities manager at OFI Asset Management.

Fuel prices fall in 10 to 15 days
For consumers in France, the current fall in oil will have an impact on fuel prices. The price of a barrel represents about 30% of pump prices, the rest being mostly related to various taxes, as well as to the margins made by oil groups and distributors. The French could benefit from a drop of up to 15 to 20 cents on pump prices, according to Benjamin Louvet’s calculations. And this price reduction could start “within 10 to 15 days” only.

This relatively short period of time is related to the fact that fuel is sold through gas stations owned by shopping centres with low inventories and which will have to quickly replenish with the new prices,” explains the commodities specialist.

Bruno Le Maire said that the fall in oil prices was “very good news for all those who are filling up” this morning at the microphone of France Inter. The economy minister also assured that the price drop would “reverberate at the pump,” AFP reports. “They have to reverberate, I’ve already had the opportunity to tell the oil companies, as quickly as possible,” he insisted.

Fears over the banking sector
But Bruno Le Maire also said that this fall was “not necessarily” good news for the French economy. “Having an oil price falling too much is worrying the markets,” which has “an impact on the financing of our companies and therefore on our economy,” he said. In addition to the tumble in shares of oil companies — Total plunged 14.66% and Technip fell 22.02% at 5:20 p.m. on the Paris Stock Exchange — banks also showed sharp declines. “The banking sector can be affected if there are bankruptcies of oil groups,” says Benjamin Louvet.

Crédit Agricole and Societe Generale saw their shares collapse by 17.27% and 16.12% respectively. If the price decline were to last, renewable energy and electric cars could also be affected. Low oil prices will reduce the financial interest in investing in this sector.

Severe consequences for some producing countries
For the first time since the financial crisis in 2009, global demand for oil is expected to contract this year due to the outbreak of the new coronavirus, the International Energy Agency (IEA) said on Monday. It is expected to decrease by 90,000 barrels per day compared to 2019, according to its central scenario.

The consequences could be terrible for several states. “I am concerned for some of the big oil-producing countries: there are huge strains on the financial balance of many producers, while the collapse in oil prices is driving their revenues to historic lows,” said Fatih Birol , the executive director of the IEA, according to AFP. These include Algeria, Iraq, Nigeria, but also Iran, Libya and Venezuela.

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